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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Best Reasons to Refinance
With the mortgage rates still quite close to the all-time lows, it might be a good time to refinance your mortgage to save on your monthly payments or take some cash out and get your home renovated.
It is important that you consider all the details and factors carefully before you make a decision on whether you want to refinance or no.
Homeowners refinance for a variety of different reasons. Here are some best reasons to refinance your mortgage.
1 - Lower interest rates
One of the most popular reasons to refinance among homeowners is to acquire lower interest rates.
Homeowners with high-interest rates can take advantage of the lower rates and also shorten their loan term through a rate-and-term refinance.
The economy right now is in what w call a low-rate environment, making it less expensive to borrow money.
Also, mortgages with shorter terms have typically low-interest rates compared to longer-term mortgages.
2 - Consolidate Debts
A cash-out refinance can be a good option to get some cash and save money in the long run if you have some high-interest debts on personal loans or credit cards.
However, a drawback to cash-out refinance is that you may not be able to deduct from tax the interest you pay if the cash is not used to buy, build, or significantly improve your home.
It is important to understand that you are securing an unsecured debt using your home and thus you have to be careful and make sure you can afford the new terms to minimize the risk of losing your home.
3 - Cash-out
Homeowners often tap into their home equity through a cash-out refinance to get some cash in hand and fund expenses like renovations, repairs to the home, or sometimes even the college or school fee of a child.
Another benefit of a cash-out refinance is that when used to renovate your home, it adds to the value of the home, and the refinance rates are usually lower compared to other loans.
The interest you pay on a cash-out is also deductible from tax.
4 - Get rid of Mortgage Insurance
Another good reason to refinance is to lower your monthly payments, especially if you have private mortgage insurance (PMI) and your loan is insured by the Federal Housing Administration (FHA).
Although FHA loans are a good option for borrowers that do not have much savings or a good credit score, it also has a con to it- obligatory mortgage insurance.
After the payment of an upfront premium of about 1.75% of the loan amount, a majority of FHA borrowers keep paying a mortgage insurance premium of 0.85% annually, for the remaining term.
This FHA loan can be refinanced into a conventional loan if a borrower wants to get rid of the PMI once he/she has acquired 20% equity in the home.
5 - Reduce loan term
Borrowers can refinance their current mortgage into a new mortgage with a reduced and much shorter term compared to the current mortgage.
This helps the borrowers to pay off the mortgage in a much shorter span of time for instance if you refinance a 30-year mortgage to a 15-year mortgage.
Another good reason to refinance and reduce the term of your mortgage is that mortgages with shorter terms have lower interest rates compared to long-term mortgages.
However, a downside to reducing the mortgage term is that it will affect your monthly payments.
You will basically be paying more as monthly payments due to the simple fact that you have to pay off the loan in a much shorter term.
6 - Increase the loan term
Alternatively, to reducing the loan term, you can also refinance to increase the loan term.
A longer-term mortgage will have a higher interest rate and thus you will be paying more interest, but at the same time, you also save on the monthly payments as a longer-term mortgage has considerably lower monthly payments.
Not everyone can afford to pay high monthly payments and would rather prefer a longer-term with lower monthly payments.
7 - Converting an ARM to a Fixed-rate mortgage and vice versa
An Adjustable-Rate Mortgage usually offers a lower interest rate initially, compare to a Fixed-rate mortgage.
However, the periodic adjustments to the interest rate of an ARM can eventually result in a much higher interest rate.
Refinancing from an ARM to a fixed-rate mortgage can help eliminate these adjustments and acquire a lower fixed mortgage rate.
Alternatively, if the interest rates are going down, a borrower may refinance from a fixed-rate mortgage to an ARM to acquire even lower interest rates.
This can also be a good plan for homeowners that do not want to stay in the home for more than a few years.
Conclusion
There are multiple best reasons to refinance your current mortgage loan with a new one.
However, it ultimately depends upon what your particular needs and plans are for the mortgage.
Thus, before your choose a mortgage or before you refinance, you must carefully analyze every little detail and related to the mortgage and then make an informed and well-planned decision.
I never knew that refinancing your home loan makes it easier for you to pay! My friend plans to purchase a home before proposing to his long-time fiance. I’ll be sure to help him look around for a financial institution that could help him out with this.